Southwest Airlines has 'difficult decisions' ahead as it works to boost profit, COO says in video message

By Ciara Linnane

Carrier has already announced changes including ending open-seating policy, under pressure from hedge fund Elliott Management

Southwest Airlines Co.'s chief operating officer has told staff there are "difficult decisions" ahead, as the troubled company seeks to move back to profitability under pressure from activist investor Elliott Investment Management.

Andrew Watterson told staff in a video message last week that the airline needs to "change our network," according to a report from CNBC.com.

"We have a couple of difficult decisions heading our way," he said. "It's not station closures. But we need to keep moving the network to help us drive back to profitability. And so I apologize in advance if you as an individual are affected by it."

Southwest (LUV) already irked some of its own customers when it announced a series of changes earlier in the summer, including ending its hallmark open-seating policy, which has been in place for 50 years. The carrier also said it would offer premium seating options with extra legroom and would introduce red-eye flights.

The new seating policy marks a big departure for Southwest, which had said in April it was reviewing the possibility of such a move when it posted a bigger-than-expected loss for the first quarter and revenue that lagged estimates.

Elliott, which has amassed an 11% stake in the company, has called for a number of changes, starting with the departure of Chief Executive Bob Jordan.

Earlier in September, the company said Executive Chairman Gary Kelly would retire next year as part of a continued "refreshment" of the company's board of directors.

But Southwest defended Jordan, saying he is implementing "intentional changes to transform the business, meet evolving customer preferences, enhance the customer experience, further modernize the airline, and drive shareholder returns."

That follows criticism from Elliott that leadership had "stubbornly" adhered to antiquated business practices.

Read: Southwest Airlines to end hallmark open seating and offer extra legroom, but remains cautious on the rest of 2024.

Six other board members announced plans to step down, after the board meeting in November, and the company expects to appoint four new independent directors "in the near future."

In the video, Watterson said the company was implementing other changes, including allowing its flights to be listed on Google Flights and on Kayak, and that it has overhauled its advertising to attract younger consumers.

The company is not planning to furlough staff, according to CNBC, citing a person familiar with the matter, but it may scale back its footprint in some cities and ask staff to transfer to other locations.

Southwest is expected to unveil more details at an analyst day scheduled for this Thursday.

The stock was up 0.4% Monday and has gained about 1% in the year to date, underperforming the US Global JETS exchange-traded fund JETS, which is up 3.5%, and the S&P 500 SPX, which has gained 19.7%.

-Ciara Linnane

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09-23-24 1249ET

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